The Federal Financial Institutions Examination Council (FFIEC) has issued a joint statement providing guidance for financial institutions about the role of cyber insurance in risk management of informational technology systems. The FFIEC comprises the principals of the following: The Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, National Credit Union Administration, Office of the Comptroller of the Currency, Consumer Financial Protection Bureau, and State Liaison Committee.

On April 10, 2018, the FDIC, as a member of the FFIEC, issued statement FIL-16-2018, applicable to all FDIC-supervised institutions. Similarly, on April 11, 2018, the Office of the Comptroller of Currency (OCC) issued a similar bulletin (OCC Bulletin 2018-8) on the FFIEC’s joint statement, noting that the joint statement applies to all institutions supervised by the OCC. The joint statement and associated FDIC letter and OCC bulletin include the following highlights:

FDIC-supervised institutions are not required to maintain cyber insurance. However, cyber insurance could offset financial losses from a variety of exposures—including data breaches resulting in the loss of confidential information—that may not be covered by more traditional insurance policies.

Traditional general liability insurance policies may not provide effective coverage for all potential exposures caused by cyber events.

Cyber insurance does not replace a sound and effective risk management program.

Cyber attacks are increasing in volume and sophistication and that traditional general liability coverage insurance policies may not provide effective coverage for potential exposures caused by cyber events

Cyber insurance may help reduce financial losses from a variety of exposures, such as data breaches resulting in the loss of sensitive customer information.

Cyber insurance does not diminish the importance of a sound control environment; rather, cyber insurance may be a component of a broader risk management strategy.

As institutions weigh the benefits and costs of cyber insurance, considerations may include: (a) involving multiple stakeholders in the cyber insurance decision; (b) performing proper due diligence to understand available cyber insurance coverage; and (c) evaluating cyber insurance in the annual insurance review and budgeting process.

The FFIEC’s statement is not intended to contain new regulatory expectations, but instead to provide awareness of the potential role of cyber insurance in financial institutions’ risk management programs. Financial institutions ultimately remain responsible for maintaining a control environment consistent with the guidance outlined in the FFIEC IT Examination Handbook.

With the May 25, 2018 deadline quickly approaching, many businesses are scrambling to prepare for compliance with the EU’s General Data Protection Regulation (GDPR), and questions and conversations are heating up. Still others are still trying to wrap their arms around what GDPR is and what it means for U.S. businesses. For those of you still trying to wrap your heads around it, below are a few basics to help familiarize yourself with the regulation and its relevance to you.

I’m a U.S. business. Why does GDPR matter to me?

The reach of the GDPR regulation extends not only to European-based businesses, but also to all companies that do business, have customers, or collect data from people in the EU. If you even have a website that could collect data from someone visiting the site from the EU, your business could be affected. No matter where your business resides, if you intentionally offer goods or services to the European Union, or monitor the behavior of individuals within the EU, the GPDR could be applicable.

What’s the risk?

In addition to the PR or brand risk of being associated with noncompliance, GDPR provides for some pretty significant monetary penalties . Some violations are subject to fines up to 10 million EUR or up to 2% of global annual turnover, whichever is greater. For other violations, it is double – up to 20 million euros or 4% of your global annual turnover, whichever is greater. For large businesses, this could be a substantial amount.

What should I be doing?

First, talk with your general counsel or outside law firm. They can help you interpret the law, review contractual obligations and assess the company’s overall privacy policies to help guide your compliance strategy going forward. They can also help create defensible interpretations within certain ambiguous language in the regulation (e.g., what is “personal data” for purposes of the GDPR?). The Article 29 Working Party, made up of the data protection authorities (DPAs) from all EU member states, has published guidance to clarify certain provisions, which can be helpful during this process.

Second, create a cross-functional team including areas including (but not limited to): communications/PR, IT, customer experience, digital, legal and operations. This may be fairly similar to any cross-functional teams you may have (and hopefully have) already established to prepare for data breaches. This team can begin designing and implementing a compliance strategy. Under certain conditions, your business may need to appoint a Data Protection Officer (DPO) (See Articles 29 and 30).

What are some key points of the GDPR?

GDPR is a data privacy regulation in the EU that is aimed at protecting users’ rights and privacy online. It requires business to assess what kinds of data they’re collecting and to make that data accessible to users. The regulation is long and complex with several moving parts, but four key points may be worth noting.

Key Definitions: You will see several references to controllers, data subjects, personal data, and processing. This vocabulary may be unfamiliar in relation to U.S. law, but here is how these key terms are defined – as a business subject to GDPR, you may be a “controller” or you may be a “processor”. The individual is the “data subject”:

“Controller” = “the natural or legal person, public authority, agency or other body which, alone or jointly with others, determines the purposes and means of the processing of personal data; where the purposes and means of such processing are determined by Union or Member State law, the controller or the specific criteria for its nomination may be provided for by Union or Member State law.”

“Processor” = “means a natural or legal person, public authority, agency or other body which processes personal data on behalf of the controller”

“Personal data” = “any information relating to an identified or identifiable natural person (‘data subject’); an identifiable natural person is one who can be identified, directly or indirectly, in particular by reference to an identifier such as a name, an identification number, location data, an online identifier or to one or more factors specific to the physical, physiological, genetic, mental, economic, cultural or social identity of that natural person.”

“Processing” = “any operation or set of operations which is performed on personal data or on sets of personal data, whether or not by automated means, such as collection, recording, organization, structuring, storage, adaptation or alteration, retrieval, consultation, use, disclosure by transmission, dissemination or otherwise making available, alignment or combination, restriction, erasure or destruction”

Some Key Articles/Provisions:

Article 12. Transparent information, communication and modalities for the exercise of the rights of the data subject.

This article creates rules around how users give consent to record their data. The data subject must be provided with accurate information on all relevant issues, such as the kind of data to be collected or process, and for what purposes. For some particularly sensitive data, (e.g., political opinion, religion, biometric data (including photographs), health data, etc.), consent must be “explicit”. Consent must be “freely given”, meaning that the user has a “genuine” choice and be able to withdraw consent “without detriment”. The data subject cannot be obliged to consent to data processing that is not necessary to provide the service he or she has requested.

For these reasons, the traditional “notice and consent” may not be sufficient, and actionable forms or buttons may be necessary. “Silence, pre-ticked boxes or inactivity,” however, is presumed inadequate to confer consent. Recital 32 of the GDPR notes that an affirmative action signaling consent may include ticking a box on a website, “choosing technical settings for information society services”, or “another statement or conduct” that clearly indicates assent to the processing. “Silence, pre-ticked boxes, or inactivity” however, is presumed inadequate. For those reaching European citizens digitally, working with IT or UX experts may prove important to create a seamless, but compliant, experience.

Article 17. Right to erasure.

The “right to be forgotten” means that businesses must be able to remove data on a user at their “without undue delay”. Further, the businesses have an obligation to erase personal data “without undue delay” under certain additional circumstances.

Article 20. Right to data portability.

Users have the right to receive any data that a business may have on them the firm must provide such data in a “structured, commonly used and machine-readable format”. Further, the data subject has the right to transmit such data to another business without being hindered by the business that provide the data where the processing is either (a) based on certain consents or (b) carried out by automated means. Where technically feasible, the data subject also has the right to have the personal data transmitted directly from one controller to another.

Article 8 limits the ability of children to consent to data processing without parental authorization. Previous drafts of the GDPR had set the age of consent at 13 years old, which would have been consistent with the age set by the United States’ Children’s Online Privacy and Protection Act (“COPPA”). A last-minute proposal aimed to raise the age of consent to 16 years old. In the final draft, the age of consent is set at 16 unless a member state sets a lower age no below 13 years. Thus, unless otherwise provided by member state law, controllers must obtain parental consent when processing the personal data of a child under the age of 16. With the difference between the U.S. age of consent under COPPA set at 13 (COPPA) and the European age of consent under the GDPR set at 16 (unless otherwise lowered by a member state), this could present some challenges for U.S. businesses offering international services.

If you believe your business might be affected, you should already be familiarizing yourself with the GDPR regulations and be well into your compliance plan. The above summary is a sampling of key points and not a comprehensive analysis,, which should be undertaken to better understand your compliance obligations. You should also be aware of the ePrivacy Regulation which will be following on the heels of the GDPR.

Whereas the GDPR covers the right to protection of personal data, while the ePrivacy Regulation encompasses a person’s right to a private life, including confidentiality. There is some obvious overlap here, but the ePrivacy Regulation is intended to particularize GDPR for electronic communications — devices, processing techniques, storage, browsers etc. The laws are intended to be in sync, but the ePrivacy regulations are still up in the air — optimistically forecasted to be finally approved by the end of 2018, although the implementation date remains to be seen. In sum, GDPR compliance is all you can focus on right now, and hopefully GDPR compliance should position your business well for any additional compliance obligations that could subsequently arise from the finalized ePrivacy Regulation.

On August 7 2017, the U.S. Securities and Exchange Commission (SEC), through its Office of Compliance Inspections and Examinations (OCIE), published a Risk Alert summarizing observations on how broker dealers, investment advisers, and investment companies have addressed cybersecurity issues. The OCIE examined 75 financial firms registered with the SEC. The examinations focused on the firms’ written policies regarding cybersecurity. The OCIE observed increased cybersecurity preparedness since a similar 2014 observational initiative was conducted but also noticed areas of compliance and oversight that could be improved.

In particular, the OCIE observed that almost all firms that were examined maintain cyber-security related written procedures regarding protection of customer and shareholder records and information. Additionally, the examinations confirmed many of the firms are conducting cybersecurity risk assessments, penetration tests and vulnerability scans, and maintaining clearly defined cybersecurity organizational charts for workforces. However, the OCIE also observed that, in some cases, firms are administering vague or unclear cybersecurity policies, are not adequately following cybersecurity policies, or are not conducting adequate system maintenance to address system vulnerabilities. The Risk Alert concluded that, despite some improvements, cybersecurity remains one of the top compliance risks for financial firms. The OCIE noted that it will continue to monitor financial firms’ compliance in this area.

On May 31, 2017, the Federal Financial Institutions Examination Council (FFIEC) released an update to its Cybersecurity Assessment Tool.

The Cybersecurity Assessment Tool was originally released by the FFIEC in June of 2015 to help financial institutions identify their risks and assess their cybersecurity preparedness. The Cybersecurity Assessment Tool is intended to be used by financial institutions of all sizes to perform a self-assessment and inform their risk management strategies. Upon the release of the original Cybersecurity Assessment Tool, the FFIEC noted its plan to update the Cybersecurity Assessment Tool as threats, vulnerabilities, and operational environments evolve.

According to the FFIEC’s May 31st press release, the update to the Cybersecurity Assessment Tool “addresses changes to the FFIEC IT Examination Handbook by providing a revised mapping in Appendix A to the updated Information Security and Management booklets”. The updated Cybersecurity Assessment Tool also provides “additional response options, allowing financial institution management to include supplementary or complementary behaviors, practices and processes that represent current practices of the institution in supporting its cybersecurity activity assessment.”

Financial institutions can find the updated version of the Cybersecurity Assessment Tool here.

Earlier this month, the new cybersecurity regulation from the New York Department of Financial Services (“DFS“) took effect. The new regulation requires banks, insurance companies and other financial services institutions regulated by the DFS to establish and maintain a cybersecurity program designed to protect consumers and ensure the safety and soundness of New York State’s financial services industry.

The final cybersecurity regulation is very similar to the proposed regulation, which we reported on in a previous post, but contains a few notable changes:

Record retention requirements for audit trails designed to detect and respond to Cybersecurity Events were reduced from five years to three years.

Clarification that Covered Entities’ policies and procedures regarding notice to be provided by Third Party Service Providers of Cybersecurity Events cover only Covered Entity’s Nonpublic Information being held by the Third Party Service Provider.

Clarification of the circumstances under which a Covered Entity must provide notice of Cybersecurity Event to the Superintendent.

The limited exemptions have been revised to specifically include the number of employees and the gross annual revenue of a Covered Entity’s affiliates located in New York.

Clarification on the exemptions available for companies regulated under New York’s Insurance Law.

Financial institutions in other states may wish to pay particular attention to this “first-in-the-nation cybersecurity regulation” issued by a state financial regulator, particularly as it may be only a matter of time before other states follow New York’s lead.

Last month, the Financial Industry Regulatory Authority (FINRA) released its annual Regulatory and Examination Priorities Letter (the “2017 Priorities Letter”) which highlights the areas that FINRA plans to focus on in its 2017 examination of registered broker-dealers.

It should come as no surprise that cybersecurity is listed as one of the operational threats that FINRA intends to focus on in 2017. The 2017 Priorities Letter recognizes that “[c]ybersecurity threats remain one of the most significant risks many firms face.” As part of its examination, FINRA will assess a broker-dealer’s programs to mitigate cybersecurity risks, taking into consideration each broker-dealer’s business model, size and risk profile. More specifically, broker-dealers should be prepared for FINRA to (i) review the broker-dealer’s methods for preventing data loss, (ii) assess the controls the broker-dealer uses to monitor and protect its data, and (iii) review how the broker-dealer manages their vendor relationships. Also, because FINRA understands that “[t]he nature of the insider threat itself is rapidly changing as the workforce evolves to include more employees who are mobile, trusted external partnerships and vendors, internal and external contractors, as well as offshore resources,” FINRA intends to examine a broker-dealer’s controls to protect sensitive information from insider threats.

Additionally, FINRA intends on focusing on two areas in which FINRA has noted repeated shortcomings in controls among the broker-dealers that it regulates: (1) poor cybersecurity controls at branch offices (for example, poor controls related to the use of passwords, encryption of data, use of portable storage devices, implementation of patches and virus protection, and the physical security of assets and data), and (2) failure to preserve certain records in a non-rewriteable, non-erasable format, commonly known as write once read many (WORM) format pursuant to Securities Exchange Act (SEA) Rule 17a-4(f).

The full text of FINRA’s 2017 Regulatory and Examination Priorities Letter can be found here.

On December 28, 2016, the New York State Department of Financial Services (NYDFS) updated its proposed cybersecurity regulation to protect New York State. The proposed regulation is effective March 1, 2017, and requires banks, insurance companies and other financial services institutions regulated by DFS to establish and maintain a cybersecurity program designed to protect consumers and ensure the safety and soundness of New York State’s financial services industry. Entities covered by the rule include “any Person operating under or required to operate under a license, registration, charter, certificate, permit, accreditation or similar authorization under the Banking Law, the Insurance Law, or the Financial Services Law.” We last reported on the draft version of these rules in a previous post.

The rule was issued after receiving comments on the proposed rule due November 14, 2016. The updated proposed regulation, which was submitted to the New York State Register on December 15, 2016 and published on December 28, will be finalized following an additional 30-day notice and public comment period, which ends 30 days from publication, or Friday, January 27, 2017.

About Our Firm

Balch & Bingham LLP is a corporate law firm recognized nationally for its deep experience and counsel in regulated industries including energy, financial services and healthcare, and its highly regarded practices in business, environmental, government relations, labor and employment and litigation. The firm includes more than 220 attorneys and lobbyists in offices across the Southeast and Washington, D.C., who are known for a collaborative, multidisciplinary approach. Since its founding in 1922, Balch & Bingham’s commitment to an uncommon, efficient client experience has remained at the core of its mission.